By ANNE FREEDMAN, senior editor of Risk & Insurance®
Following the U.S. Supreme Court's decision to uphold the Patient Protection and Affordable Care Act, insurance companies will be challenged to maintain their financial stability.
Not only does the law limit the profits insurers can make, but it also forces them to have an adversely selected pool of insureds, experts said. The law is designed to provide coverage for all individuals regardless of their medical condition and requires everyone to purchase coverage or opt to pay a penalty -- or what the U.S. Supreme Court has ruled is a "tax" -- instead.
While advocates cheered the ruling's impact for opening up the availability of health coverage to those in need, the addition of individuals in poor health could unbalance the risk pool for insurance companies if younger, healthier individuals opt to pay the fairly minor annual penalty or tax.
The guaranteed-issue provision and the community-rating provision -- which are the underpinnings of the state-based exchanges -- mean that insurers "can't deny people coverage and you can only apply certain amounts of underwriting to them," said Jack Towarnicky, an employee benefits attorney with the National Legal & Research Group at Willis, NA in Columbus, Ohio.
"Those are not changed [by the Supreme Court ruling]. The individual mandate is not changed. The risk [to companies] is the same yesterday and tomorrow," he said.
Because insurers must provide coverage and cannot charge higher premiums to individuals in poor health, some people may opt to pay the penalty until they are sick, experts said.
"If you get in young people, if you get everyone in [the pool], you should do pretty well," said Elliott M. Kroll, a partner at Arent Fox in New York, who works with insurers and reinsurers. "What if they decide, 'You know, I will take the penalty. ... I don't want to buy insurance. I don't want to deal with it.' Or they are neglectful or they are busy. There are a million reasons.
"The problem is trying to determine the demographics of whom [the insurers] have enrolled and that's going to be the tricky part, in part because a lot of the legislation is designed to eliminate underwriting," he said.
In 2014, Towarnicky said, the penalty for a single individual will be 1 percent of gross income per year or at least $95. That rises to 2 percent in 2015 or at least $325, and 2.5 percent or at least $695 afterward, he said. However, he said, the PPACA does provide that individuals under the age of 30 can get "relatively low-cost [catastrophic] coverage to avoid the mandate," and there are "plenty of provisions available" that are designed to maximize enrollment.
Ralph Tyler, an attorney with Venable, who was the Maryland State Insurance Commissioner when the health-care reform law was being debated, believes insurers will successfully attract an adequate risk pool.
"I think the real impact on the insurance companies will be they are going to, in the years ahead, have a lot of additional customers -- people they are going to insure -- and they are not going to be just stuck being required to provide insurance without getting everyone in the pool. ... I don't think what will happen is that the penalty will become the default [option of individuals]."
The real challenge, he said, will be implementation of the state-based exchanges.
"I think the major issue for the insurance companies is complexity," said Tyler, who is based in Baltimore and Washington, D.C. They must implement the law with the "added complexity of state or federal exchanges and that will all need to be worked out -- and there is not a lot of time."
Holly Meidl, national health care practice leader for Marsh, based in Nashville, Tenn., said only nine or 10 states are prepared for the insurance exchanges that are supposed to be implemented in 2014. Twenty-six states were part of the lawsuit that lost in the High Court on Thursday.
The Supreme Court ruling, she said, only upheld what was already the law and "now that it's been confirmed, I think, it will make [insurers] step up a little bit faster." Unless, of course, results of the election in November put everything "back at square one."
Insurers in each state will need to offer policies and programs, and craft their message and branding to "capture their part of the population," through the exchanges, she said.
"It's about execution," Meidl said.
As for the individual mandate and adverse-selection issues, insurers "have already been modeling that" -- and some plans won't survive, she said.
"It's going to be difficult for them," she said. "The plans that are big enough to absorb the risk of having this riskier group with pre-existing conditions and not being able to charge them what they should charge them" forces insurers to attract more individuals to the pool.
"Some will do it and execute better than others and they will be the ones to survive and survive well," Meidl said.
"The bigger plans will and that's why we have seen some of the consolidation we have seen," with smaller plans being acquired by some of the larger Blues and other insurers. "I think the merger activity that has been going on will just increase," she said.
Some of the merger activity, Kroll said, is also by companies seeking to offer more efficient services. The law, he said, rewards qualitative operations instead of quantitative -- so insurers will be rewarded for how well they deliver services instead of, for example, how many days someone spends in the hospital.
The other significant issue for insurance companies, Meidl said, is the medical-loss ratio, which requires that 80 percent to 85 percent of every $1 be spent on medical expenses. That caps an insurance company's profit at 15 percent or less, Meidl said.
It prevents companies from putting money aside for "when the loss ratio is way over the 80 percent" and it limits their ability to invest in innovation, she said.
"That is where there is a real challenge. It will limit their ability to reinvest in their business," she said.
The medical-loss ratio may also squeeze insurance brokers, experts said, as it may limit the commissions that can be paid.
The law, Kroll said, also will ultimately "make it harder for anyone to enter into the health care insurance space because of the effective elimination of underwriting standards. It will require a lot of capital to be able to withstand rate inadequacies and to hit the sweet spot that the government has legislated," referring to the 80 percent to 85 percent profit limitation.
Insurers also face the added challenge in the PPACA of having to justify "any unreasonable premium increases" to the states and Department of Health and Human Services, he said.
"It can be very difficult to get rate increases now and I don't think it will get any easier in the future," Kroll said.
Insurers may also find it more difficult to access the reinsurance marketplace, since reinsurers are not regulated and subject to the law, he said. "It's going to be a lot more expensive and a lot less available than it is now.
Kroll said: "We are on the cusp of a very significant change with respect to the delivery of health care in the United States."
June 29, 2012
Copyright 2012© LRP Publications